Tuesday, April 20, 2010

What to do with a 0 balance card

Well, the two new credit cards that I wrote about earlier are up and running. I put 100% of the available credit from the first one (Citi, $1,600, 0% on balance transfer for 7 months) and 65% of the second one (Discover, $3,600, 0% on balance transfer for 12 months) toward the balance on the previous card (Bank of America, 19.9% interest). I put $300 from my tax refund immediately to the Citi card, and $178 to the BA card, bringing the balance to zero. (Don't congratulate me, it's not an accomplishment, it's a machination at this point.)

The question now is, what to do with the BA card. There's part of me that just wants to cancel the account and be done with it, especially since I'm kind of mad at BA that they kept lowering my limit in the aftermath of my house disaster and because I couldn't get them to lower the interest rate on the card. (In case you're wondering, we were never late or delinquent on the card. The only mark against my credit is the short sale of the house.)

However, a quick perusal of some of the PF sites suggests that canceling this card might be counterproductive, since it's my longest-standing credit line and it's in reasonably good shape - and, now that it's at 0, it helps my credit utilization percentage, which is one of the elements of the FICO score (and which is pretty high on the balance transfer cards). Here's a couple of representative examples: Frugal Dad, "Closing Credit Card Account Affects Credit Score," and Rich Credit Debt Loan, "Why is it Bad to Cancel a Credit Card?" Money quote:

When you end up closing out open accounts, then those credit lines will no longer be factored into your good credit ratio, and so you are going to be upping your debt ratio in a bad way. This is a silly thing to do and is going to end up costing you in the end.

Well, I don't want to be silly. On the other hand, there's this, "10 Reasons for Canceling Credit Cards," from Dollar Stretcher. I am not in the market for a house, and it will probably be some years before I am (due to both the black credit mark and our inability to save a down payment while we're paying down debt). I hate feeling like I'm jumping through hoops for the FICO score, but on the other hand, I don't feel the need to damage my standing unnecessarily either.

The other major consideration in this is if I feel that I won't be able to resist credit temptation. Right now I'm feeling pretty good on that front, the cards are all in the underwear drawer and I'm pretty motivated to get out of debt, I'm happy to have this card at zero, and anyway I have other credit cards available to me now, so getting rid of this one isn't going to save me if I am not to be saved.

So the conclusion is: this card will get cut up, but I'll leave the account open. As (b'ezrat Hashem, ptui ptui ptui) the newer two cards get paid off, I'll cancel those accounts - those are shorter term and so canceling them won't have the impact on our credit that canceling this one would. When, somewhere down the road, we get to the point that we want to have the use of a credit card, we can decide then which one to use.

But whether the account is open or closed, it's important at this stage for us to treat the credit as though it's not available.

33 comments:

good idea on cutting the card up. It's best to just remove the source of the temptation all together. We had a Amex account open with a zero balance for the longest time because of the reason that we didn't want to hurt our credit score by closing it. At this point we're out of debt, and not looking to get any new home loans or anything, and we're not as concerned about our credit scores - so a while back we cut up the Amex card and canceled the account. Good luck on paying off the rest of the debt!